Category: Building Progressive Region

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Image: opportunityinsights.org

Last week a non-profit research and policy organization, Opportunity Insights published a startling map and database linking the success of children in poverty to their neighborhood to climb out of poverty. A key finding is that children growing up in neighborhoods where there is low income continue to live in poverty as adults. Though of more interest is that all factors being equal children where there where two parents in the household did significantly better than children in one parent households. Family structure made a significant difference.

Source: Opportunity Insights – 10/4/18 (areas in blue, children who grew up in low income areas tended to make more money, children in dark red far less)

Certainly, households with just one bread winner, generally automatically means that there is less income in that household. Opportunity Insights notes that often single parent communities do not have the same ‘social capital’ as two parent communities. In terms of parents that can support their children, tutoring after school, going to after school activities and a father who is there to provide support to the mother. Particularly, for boys having a father in the household seemed to be determinative in future opportunities boys enjoyed in adult life. Key to forming the right skills for a higher income is an example of a mother or father working a job, focusing on nurturing their children’s skills and being an advocate for the child in the school system.

John Hope Bryant, CEO of Operation Hope, a for purpose non-profit group helping low income people through financial coaching and skills development to build a secure economic future. Bryant notes that 63 % of middle income Americans cannot afford a $500 car repair or $1000 in emergency health care. Without financial independence, people cannot protect themselves from social injustice, economic manipulation and profiling, People need to learn how to build personal ‘capital’ to dig out of the community that keeps them in poverty. He observes growing up in Compton, a California low income community, that children in the neighborhood grew up with no positive aspirations. They continue to be surrounded by negative roles models: drug dealers, loan sharks, and criminals who have the economic power. Yet, they don’t have the ‘capital’ or knowledge on how build wealth in a positive way and key relationships. A person with no hope is a dangerous person, who becomes angry, vengeful and desperate. Bryant says there are three types of issues for children in poverty neighborhoods: low aspiration and few opportunities for 25 % of the problem, poor role models and a negative family and community environment for another 25 % and finally low confidence and self-esteem for 50 %.

Next Steps:

The Labor Force Participation Rate for adults ages 24 – 54 is 82.5 % is at a new low, and has been declining since the Great Recession. The opioid crisis, a symptom of the hopelessness that many of our young people feel today is causing millions of otherwise productive people to not join the labor force. Deutsche Bank completed an analysis of how the opioid epidemic is hurting labor participation in many states.

Sources: OECD, Deutsche Bank Research – 9/10/18

Researchers found that states in the South (overlays the poverty areas in the neighborhoods map above) Alabama, Mississippi, Arkansas and East Central – West Virginia there is a high correlation of opioid prescriptions and labor force rate.

It clear from a moral, ethical and economic standpoint we need as a country to invest in our young people who face increasing challenges in becoming upwardly mobile. How do we do it?

John Hope Bryant is investing in people in these neighborhoods by providing families and individuals with tutoring to increase credit scores (maps of FICO scores of under 500 map into the above areas too) and how to get low cost loans. Bryant sees developing entrepreneurial skills in starting new businesses as a way to move economically ahead as well. More important is learning how high income people became wealthy through building relationships and developing the courage and skills to start a new business. As he notes, moving from one failure to the next to learn and see trial and error as a necessary part of the path toward creating a product or service of value. The entrepreneurial process builds self-esteem and confidence so crucial in transforming lives and creating opportunities.

Opportunity@Work, a non-profit group originated in the Obama White House, then spun off is tackling the education issue head on with training focused on helping those outside of the economic mainstream to get jobs in the new economy. The group helps candidates get the skills they need in high tech, then making the connection between employers and workers with a non-traditional resume. In addition, they are pioneering new ways to finance education so that students will not be saddled with thousands of dollars of education debt when they start their careers. Opportunity@Work is targeting assistance for 1 million people to get hired in the next decade.

We have proposed that a Marshall Plan-like initiative with an entrepreneurial approach be led by the federal government, venture capitalists, corporations, health providers, non-profits and universities to gain a beachhead in many low income communities particularly in rural areas of the Midwest and South. The Heartland Initiative brings key leaders in many fields to focus with high impact on enabling a community and its people to join the economic mainstream from upgrading Internet speeds to providing local access to affordable health care and counseling for mental health issues. It is a multi-faceted project because there are connected issues, it is one thing to provide a young person with training, but if they are still taking opioids they will fail a drug test by a hiring firm. Details about the Heartland Initiative are in our post, calling for a new approach to social programs using an entrepreneurial model with seed financing and cooperative groups to spring into action.

We need to bring those that have been on the economic sidelines back into the mainstream of our economy if we are to make any progress as a nation on building an economy that works for all. With mounting national debt in the trillions of dollars, student debt at $1.5 trillion and opioid deaths at epidemic levels we need to see building the economic power of our youth as one solution to our economic challenges.

More millennials are living with their parents than ever before due to lack of income, availability of housing and marriage later in life. Moves by people under age 35 are continuing to decline. Seniors are moving a bit more but overall they are staying put in their homes for retirement, as the cost to move to a new home is soaring. Home prices have increased on average by 6.7 % per year over the past five years, skewed toward large square foot homes for upper income buyers.

Source: Trulia – 1/31/2018

Overall Americans are not moving like they used to in the 1990s, and before the Great Recession. In 2017, 34.9 million Americans moved to new residences, translating to a household mobility rate of 10.9%, which is the lowest rate in the last 50 years since the Census Bureau has been tracking this statistic. Lack of mobility is showing up in total household formations including rental units, new and existing home figures. For all of 2017 there were only 400,000 household units formed, notice this is a similar pace to the aftermath of the Great Recession.

Source: Federal Reserve of St. Louis, 1/2018

The mobility that is taking place is from major cities to major cities or coast to coast. We noted in our post on Heartland Economics that one of the issues that faces many rural regions in the South and Midwest is lack of new jobs, digital infrastructure, health and education services. When young people in these regions cannot receive the education they need to build a career where there are jobs in the cities they stay where they are in low wage jobs with few prospects of advancement. The opioid epidemic is worst in rural regions in the country where a sense of hopelessness has set in for many people. While in the last quarter some of these regions have seen an increase in jobs, this increase in economic activity is likely to be a passing surge from a very low economic base to begin with that will not last without long term investment.

Next Steps:

Why should we be concerned with lack of workforce mobility? Because, when people do not move to take on new jobs, or start families or get away from home, home purchases decline, furniture sales drop, appliance sales fall and the overall economic life blood of our economy stagnates. What do we need to do? Raise wages for workers to a decent level in each metro and rural region of the country, so people can build a nest egg and make a down payment on a home. Rental unit pricing needs to be addressed in a way that is fair to the multiunit owner while holding down rental costs. The most recent Tax Bill passed in December of 2017 eliminated the provision for tax deductions by employers or workers for unreimbursed moving expenses. This provision needs to be reinstated to drive the costs of moving down. Interest on first mortgages should be made tax deductible for all regions of the country with a special emphasis on low income first time buyers. In rural regions we recommend special tax zones be established to offer incentives for investors to setup businesses there, with partnerships with local universities to build incubators for startups much along the model pioneered in Silicon Valley yet tuned to the needs of the region. The size of our workforce is declining, we have young people staying at home so we need to address the issue of lack of mobility head on to provide the life opportunities to our young people that earlier generations enjoyed.

From a big picture economic perspective, we can’t wait any longer to build democratic capitalism. The Federal Reserve has lowered interest rates almost to zero since 2008, which has fueled the stock market, helped corporations borrow money at cheap rates, and allowed them to do stock buybacks to manipulate the stock price – benefiting the Elite. The Middle Class continues to lose ground with percentage of net household wealth at its lowest point last seen in 1941!. Recent Gallup Poll figures show the real unemployment rate (including those that want to work ad can’t or have dropped out of looking for work) at 9.7 %. Job automation and virtualization marches on, cars may drive themselves – reducing the need for taxi drivers, factories continue automation, the Internet provides access to low cost workers and contracted skill sets, and virtualization means fewer face to face contacts (reducing the number of jobs in the hospitality industry for example). New business formations have dramatically dropped a key engine of job growth versus major corporations.

What labor model can provide us insight? The German labor policy supports worker councils in partnership with management, short term hours (meaning when there is a recession all workers reduce their hours and are still employed), child care is available to help mother’s balance work-family life, and summer 4 week vacations support family life. New high value jobs are created, and Germany has a net export economy (more goods and services are exported than imported). During the 2009 recession unemployment rates actually went down in Germany from 2007 levels! Workers took shorter hours, instead of being laid off. Prior to the Great Recession workers established a countervailing balance of power with corporate management.

So, how do we create labor equality and economic upward mobility? We need progressive programs jump started and headed in the right direction. Who will lead? Today, our Congress is gridlocked, with little leadership in providing vision, or investing in programs to support the growth of the Middle Class. Waiting for government to take the first step will be a long political process (though worth doing in parallel). Corporations are at the highest level of cash hoarding in the last 10 yrs at $1.3 Trillion, and benefit by investing in automation resulting in increases in productivity. Corporations have no interest to shift investments toward worker development or creating new corporate governance programs sharing management.

Take action now! How do we get started? Bring together NGOs, advocacy groups, wealthy progressive leaders, enlightened corporations focused on worker development and build a proof of concept or prototype of a democratic capitalist region. Programs would be built in cooperation with progressive corporations creating worker development initiatives, short term hours, training, career development, $15 an hour wages. Create transparency in corporate stock programs, ending extraordinary CEO pay, worker – management councils, offer child care at reasonable rates, provide vacation options. Offer low cost or free 4-yr public college education programs, and low cost student loans with reasonable terms. Focus on how to support workers dislocated by job loss in retraining, and new workers gaining skills to compete. We need to create incubators and programs developing new businesses in a variety of sectors not just technology. Where do we setup these programs? Possible proof of concept regions with progressive leaders: Seattle, San Francisco, Austin, Boston. Nick Hanauer’s team has been working in the Seattle area – Civic Ventures.

The Story:

The Federal Reserve has been priming the economy with near zero interest rates since the 2008 recession by itself, with little worker or infrastructure investment by Congress or corporations. Low interest rates has created a very low cost of capital used by Wall Street to inflate stock values and corporate executives to borrow money, sometimes to perform stock buybacks to keep stock prices high. Who benefits? The top 10 % in population (generally very wealthy) holds 81 % of all stock investments, so they have been the big beneficiaries (Forbes, May 2015) creating more inequality.

The Middle – Class continues to lose ground as this chart from Saez and Zucman, NBER, 2016 indicates (click on the image make larger):

The bottom 90 % has continued to lose ground while the top .1 % has increased their share of household wealth, it even accelerates after the Great Recession. We see few programs being put in place to change this paradigm.

Recent Gallup Poll figures show the Real Unemployment rate is actually 9.7 % (vs. reported unemployment rate of 4.7%) when figures for those who have stopped looking for work, or a worker who works a minimum of 1 hr per week and receives $20 in compensation are included. Gallup has created a Good Jobs (percentage of population in 30 hr week job with regular paycheck) indicator now at 46.1% has been been moving sideways since 2010.

Job creation has been driven by the formation of new businesses, however the formation of new businesses is at an all-time low, with business closings actually ahead of new business formations (click on the image to make larger):

The present rules of the game tipped toward major corporations, franchises, and box stores make it extremely difficult for new businesses to form in many regions.

In addition to new business formulation, overall where will new jobs be created, we need to look at trends in virtualization and automation. Driverless cars – mean fewer taxi drivers, factory automation (ie. Amazon is deploying robot automation to all 10 of its distribution centers across the US), requires fewer handlers. Virtualization will mean fewer face to face contacts (robots delivering food to rooms for example) in customer services, impacting the hospitality industry among others. A trend we need to face is the continuing reduction in labor force participation due to fewer jobs, as Bill Gross points out that labor participation was at a peak of 82% in 2000 and in 2015 down to 78% translating into a 6M job loss. What kind of future labor policy, and programs in partnership with corporations do we want for democratic capitalism?

What labor policy model seems to be working demonstrating basic democratic capitalism principles? The experience of Germany during the Great Recession is helpful to trigger some ideas. . John Schmitt, CEPR (Center for Economic and Policy Research) outlines how German labor policy established a resilient response to the crisis even though it suffered a painful recession deeper than the US. Prior to the recession, Germany already had 63 % of its work force under collective bargaining agreements vs. the US at 13 %. They were able to have this high percentage of collective bargaining in place, yet raise real average worker salaries by 35 % since 1985 (Saving Capitalism pg 127, Robert Reich). Germany is running a net export economy at $20B in 2016 (without having to hollow out their Middle Class jobs). Their resilience was in the offering short-time work agreements to reduce the number of hours worked vs. layoffs. When I worked at HP in the mid – 1980s during a recession then, we reduced hours by 10 % by not working the 10th day, yet we were requested to voluntarily work on the that day to get new products out and build sales. We were successful in jumping ahead of competitors and opening new product lines and sales because the work force was in place when demand increased.

It works, but management has to work harder at developing new markets, creating demand, and competitive value propositions. Germany has moderate employment legal protection at 3.0 based on an OECD 6 point scale (with 6 the greatest protection in terms of severance pay, advanced notification of dismissal and legal process). The US is at .2 the very lowest of all OECD countries. So, the US has some labor policy work ahead. Other labor policies that are implemented include low cost child care, longer vacations than in the US, worker councils sharing management of corporate policies, and

We need action now! Where is it going to come from? Congress is controlled by the GOP, with no interest in creating a democratic capitalist economy but continuing the present oligarchy run by the Elite. Our two presumed presidential nominees have the the highest unfavorable ratings of all presidential candidates in the last 30 years – they carry little mandate for change. Corporations are now sitting on over $1.3 Trillion in cash, yet with limited investment in technology have been able to achieve increases in productivity to drive profits returned to shareholders. I have participated in corporate councils, and see corporations making de facto employee policy decisions every day, and planning 5 – 10 years ahead. We need to be thinking ahead too, looking out for workers welfare working with progressive corporations. We can change minds with results from a proof of concept program, while we continue political change, at a certain point in time there will be a tipping point in citizen opinion and the laws will get passed.

The Action:

By moving ahead now, we can show results much quicker, with measures to support advocacy programs. First, we take a baseline survey or analysis of the region along the line of the parameters our programs will change ie former manufacturing workers who can’t find work, implement retraining, corporate partnerships, get these workers jobs and then survey the results.

We focus our efforts in specific regions to have impact ‘narrow and deep’ vs. wide and shallow. Regions with progressive leadership as possible project areas include: Seattle, San Francisco, Austin, and Boston. Nick Hanauer’s team has been working in the Seattle area – Civic Ventures.

Working in partnership NGOs, advocacy groups, local government and progressive corporations key programs can be designed, implemented and evaluated for worker development, short term hours, training career development and $15 hr wage. New levels of transparency and management policy sharing in stock programs, CEO pay, worker-management councils, child care at reasonable cost, with longer vacation/off time options (HP, Tandem and other Silicon Valley companies used to offer sabbatical leaves for personal development). Develop low cost or free public college education programs. Assist students in converting student loans to reasonable interest rates and suitable payoff policies with local banks. To support new business formation; we provide new business incubators, with local business leader support, venture financing and business in a variety of business sectors not just technology.

When we bring together NGOs, advocacy groups, progressive politicians, foundations, wealthy progressive leaders, corporations to build a prototype example of democratic capitalism we are building countervailing power for labor.